Branch v. FDIC, Civ. A. No. 91-10976-Y

• Court: United States District Courts. 1st Circuit. United States District Courts. 1st Circuit. District of Massachusetts
• Writing for the Court: William W. Abendroth, Boston, MA, for consolidated defendant Fleet Bank-NH
• Citation: 825 F. Supp. 384
• Parties: Dr. Ben S. BRANCH, as Trustee of Bank of New England Corporation, and derivatively on behalf and in the name of Connecticut Bank and Trust Company, N.A. and Maine National Bank, Plaintiff, v. FEDERAL DEPOSIT INSURANCE CORPORATION, in its corporate capacity, Federal Deposit Insurance Corporation, in its capacity as receiver for Bank of New England, N.A., Connecticut Bank & Trust Company, N.A., Maine National Bank, Federal Deposit Insurance Corporation, in its capacity as receiver for New Bank of New England, N.A., New Connecticut Bank & Trust Company, N.A., and New Maine National Bank, and Fleet Bank of Massachusetts, N.A., Fleet Bank, N.A., and Fleet Bank of Maine, Defendants.
• Decision Date: 22 June 1993
• Docket Number: 92-10807-Y,Civ. A. No. 91-10976-Y,92-10091-Y,92-10904-Y and 92-12091-Y.

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Dr. Ben S. BRANCH, as Trustee of Bank of New England Corporation, and derivatively on behalf and in the name of Connecticut Bank and Trust Company, N.A. and Maine National Bank, Plaintiff,
v.
FEDERAL DEPOSIT INSURANCE CORPORATION, in its corporate capacity, Federal Deposit Insurance Corporation, in its capacity as receiver for Bank of New England, N.A., Connecticut Bank & Trust Company, N.A., Maine National Bank, Federal Deposit Insurance Corporation, in its capacity as receiver for New Bank of New England, N.A., New Connecticut Bank & Trust Company, N.A., and New Maine National Bank, and Fleet Bank of Massachusetts, N.A., Fleet Bank, N.A., and Fleet Bank of Maine, Defendants.

Civ. A. Nos. 91-10976-Y, 92-10091-Y, 92-10807-Y, 92-10904-Y and 92-12091-Y.

United States District Court, D. Massachusetts.

June 22, 1993.

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Richard Hiersteiner, Palmer & Dodge, Boston, MA, for plaintiff John L. Whitlock, Trustee of Bank of New England Corp

Hugh M. Ray, Andrews & Kurth, Dallas, TX, Van Oliver, Andrews & Kurth, Houston, TX, for plaintiff Ben Branch.

Jon D. Schneider, Goodwin, Proctor & Hoar, Boston, MA, for defendant New Bank of New England, N.A.

Jon D. Schneider, Goodwin, Proctor & Hoar, Deborah S. Griffin, Peabody & Arnold, Boston, MA, for defendants New Connecticut Bank & Trust Co., N.A., New Maine Nat. Bank.

Deborah S. Griffin, Peabody & Arnold, Boston, MA, for defendant F.D.I.C., an agency of U.S., in its corporate capacity and as Receiver for Bank of New England, N.A., as Receiver for Connecticut Bank & Trust Co., N.A. and as Receiver for Maine Nat. Bank.

William W. Abendroth, Boston, MA, for consolidated defendant Fleet Bank-NH.

Deborah S. Griffin, Peabody & Arnold, Boston, MA, Thomas A. Schulz, Charles L. Cope, II, Wendy B. Kloner, Tom M. Reeves, Susan K. Bank, Steven Kaufman, F.D.I.C., Washington, DC, for consolidated defendant F.D.I.C.

MEMORANDUM AND ORDER

YOUNG, District Judge.

During the late 1980s, Bank of New England Corporation ("BNEC"), a bank holding company, owned numerous subsidiary corporations including three national banks: Bank of New England, N.A. ("BNE"), Connecticut Bank and Trust Company, N.A. ("CBT"), and

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Maine National Bank ("MNB") (collectively, the "Subsidiary Banks"). In 1989, BNEC and its Subsidiary Banks came under increased federal regulation due to financial problems at BNE. During the next several years, and allegedly under direction of several federal regulatory agencies, many of BNEC's assets were transferred both downstream from BNEC to its Subsidiary Banks, and sidestream from CBT and MNB to BNE. On January 6, 1991, the Comptroller of the Currency declared all three Subsidiary Banks insolvent, and BNEC filed for Chapter 7 bankruptcy one day later. The Federal Deposit Insurance Corporation ("FDIC") was then appointed receiver for the Subsidiary Banks, and subsequently transferred the Subsidiary Banks' assets first to several bridge banks (the "Bridge Banks"), and then to several private banks (the "Fleet Banks" or "Fleet")

This is a consolidated action by Dr. Ben S. Branch ("Branch"),¹ Chapter 7 Trustee of BNEC, to recover from the FDIC in both its corporate and receivership capacities, as well as from the Fleet Banks, over $2 billion in assets allegedly wrongfully transferred to and among BNEC's Subsidiary Banks. The gravamen of Branch's Complaints is that federal banking regulators, rather than close BNE upon its actual insolvency in 1989, instead kept it open in order to facilitate the transfer of BNEC's assets to BNE for the purpose of reducing the FDIC's liability to BNE's depositors when, as was then inevitable, BNE ultimately failed. Branch seeks recovery of the transferred assets under the Bankruptcy Code, the National Bank Act, the Federal Reserve Act, and Massachusetts common law. The defendants move to dismiss these consolidated actions upon a battery of jurisdictional and substantive defenses which raise important issues in uncharted areas of federal banking law.

I. REGULATORY FRAMEWORK

These disputes arise within a complex regulatory framework and involve multiple federal regulatory agencies acting in several capacities. The Office of the Comptroller of the Currency ("OCC") is a Treasury Department agency responsible for chartering, examining, and regulating national banks. The Board of Governors of the Federal Reserve System ("FED") is a federal banking agency charged with regulatory and supervisory control over bank holding companies that are members of the federal reserve system. Under the Federal Deposit Insurance Act (FDIA), 12 U.S.C. §§ 1811-33e, the OCC and FED are empowered to issue Cease and Desist Orders against banks and bank holding companies, respectively, in order to halt or remedy "unsafe or unsound" banking practices. 12 U.S.C. § 1818(b)(1), (3). Banks and bank holding companies may appeal the issuance of Cease and Desist Orders pursuant to an administrative scheme established by the FDIA. 12 U.S.C. § 1818(b), (h).

Under the National Bank Act (NBA), 12 U.S.C. §§ 21-216d, the OCC is empowered to place a national bank into receivership whenever it "shall become satisfied of the insolvency" of the bank. 12 U.S.C. § 191. Under the FDIA, the receiver appointed by the OCC for an insolvent national bank must be the FDIC. 12 U.S.C. § 1821(c). This puts the FDIC in the position of acting in two separate capacities with respect to the insolvent bank. First, the FDIC acts in its corporate capacity ("FDIC-Corporate"), as an insurer of up to $100,000 on each deposit at the failed bank. 12 U.S.C. §§ 1811, 1821(a), (f). Second, the FDIC acts in its receivership capacity ("FDIC-Receiver"), in which it is responsible for marshalling the insolvent bank's assets and distributing them to the bank's creditors and shareholders. 12 U.S.C. §§ 192, 194,

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1821(d)(2)(H). The FDIC is often required to deal with itself in its separate capacities, such as lending or selling to itself

In fulfilling its duty to pay depositors when a bank is declared insolvent, the FDIC has two primary alternatives: liquidation or sale of the failed bank's assets to a bridge bank pursuant to a purchase and assumption agreement. A liquidation involves closing the insolvent bank, selling its assets, paying depositors their insured amounts, and covering any shortfall from an insurance fund created from assessments paid by the insured banks. 12 U.S.C. § 1821(a). A liquidation may have substantial disadvantages: "accounts are frozen, checks are returned unpaid, and a significant disruption of the intricate financial machinery results." Gunter v. Hutcheson, 674 F.2d 862, 865 (11th Cir.1982), cert. denied, 459 U.S. 826, 103 S.Ct. 60, 74 L.Ed.2d 63 (1982). The probability that uninsured deposits or liabilities will be paid in any substantial part is slight, and the cost to the FDIC of simply covering insured funds is great. Texas American Bancshares, Inc. (TAB) v. Clarke, 954 F.2d 329, 333 (5th Cir.1992).

Purchase and assumption transactions, on the other hand, are often "a dramatically effective and cost-efficient way to protect depositors, the banking system, and the resources of the insurance fund." Federal Deposit Ins. Corp. v. Bank of Boulder, 865 F.2d 1134, 1136 (10th Cir.1988), cert. denied, 499 U.S. 904, 111 S.Ct. 1103, 113 L.Ed.2d 213 (1991). Instead of closing the failed institution, FDIC-Receiver sells most of the assets and liabilities of the failed bank to a bridge bank pursuant to a Purchase and Assumption Agreement.² The bridge bank then opens the next day with no interruption of banking services or loss to depositors. In situations in which the liabilities assumed by the bridge bank exceed the assets acquired, FDIC-Corporate is authorized under FDIA to pay the bridge bank the difference in a cash payment. This cash is obtained from the FDIC's insurance fund, and in exchange, FDIC-Corporate acquires the untransferred, unassumed assets of the failed bank. The bridge bank's charter terminates on the earliest of several events, including the assumption of substantially all of the deposits and other liabilities of the bridge bank by a third party bank. 12 U.S.C. § 1821(n)(10). See generally TAB, 954 F.2d at 333.

The scenario in this case runs the gamut of federal banking regulation, encompassing both pre-insolvency regulation by the OCC and FED, as well post-insolvency purchases and assumptions facilitated by the FDIC.

II. FACTUAL ALLEGATIONS³

In the 1980s, BNEC was a bank holding company owning numerous subsidiary corporations including the federally insured banks BNE, CBT, and MNB. During an annual on-site review in 1986, the OCC first discovered that BNE, BNEC's largest bank subsidiary, possessed an overly concentrated portfolio of risky real estate loans—a problem compounded by poor management and faulty loan assessments. During the next several years, and despite repeated warnings by the OCC, these problems caused BNE's financial condition seriously to deteriorate. On July 17, 1989, the written results of the OCC's December 31, 1988 examination of BNE revealed that BNE's credit quality had declined significantly due to poor quality of loans and aggressive, uncontrolled growth of its loan portfolio. By the summer of 1989, BNE was already insolvent to the point that the value of BNEC's 100% stock ownership

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in BNE was effectively zero, and thus there was no realistic expectation that BNEC would ever receive any return based on that ownership. This loss of value also rendered BNEC insolvent by the summer of 1989. In contrast, BNEC's other two national subsidiary banks, CBT and MNB, were still fully solvent at that time, and thus BNEC's 100% ownership of those banks was...